China's economy strengthened in late 2018

ChinaFotoPress/Getty Images
  • Activity levels across China’s manufacturing and services sectors improved at the fastest pace in five months in December.
  • New orders rose while new export orders declined, indicating the improvement is being driven by domestic demand.
  • Concerns about the Chinese economy was a major factor behind the selloff in stocks, commodities and China-linked currencies in the final months of 2018.

The Chinese economy improved in the final month of 2018, helped by stronger activity across both manufacturing and non-manufacturing sectors.

The IHS Markit China Composite Purchasing Managers Index (PMI), produced in conjunction with the Caixin Insight Group, rose to 52.2 in December in seasonally adjusted terms, leaving it at the highest level in five months.

This PMI measures perceived changes in activity levels across China’s manufacturing and non-manufacturing sectors from one month to the next.

Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

This survey tends to focus on small to medium-sized firms whereas China’s official composite PMI, released by the government, captures responses from small, medium and large-scale manufacturers, including state-backed firms.

IHS Markit

According to the latest survey, the improvement in December was broad based with activity levels improving at both services and manufacturing firms.

“The improved headline index reading was supported by higher activity levels across both the manufacturing and service sectors,” IHS Markit said.

“Services companies registered a solid rate of activity growth, while manufacturing output expanded slightly after two months of stagnation.”

Of note, the group’s China General Services Business Activity Index rose to a six-month high of 53.9 in December, indicating the broader improvement was led by services firms.

Zhengsheng Zhong, Director of Macroeconomic Analysis at Caixin Insight Group, said the lift in the composite PMI delivered mixed news on the current health of the Chinese economy.

“Although the index for new export business rose, the one for overall new orders dropped, reflecting weakening domestic demand,” he said, indicating that trade tensions between the United States and China are continuing to impact demand from abroad.

“The employment gauge slipped further into negative territory, implying increasing challenges to stabilizing employment, which was the broader context of December’s central government policies to increase jobs.

“The gauges for input costs and output charges continued to drop, pointing to easing inflationary pressures.”

With activity levels continuing to improve, optimism towards the outlook also edged higher after falling earlier in the quarter.

“The degree of optimism edged up to a three-month high at manufacturers, while services companies saw expectations improve from November’s recent low,” he said.

“However, overall business confidence remained relatively subdued in the context of historical data, with a number of surveyed firms citing concerns over relatively soft market conditions.”

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